India imposes restrictions on gold loans

"Change is in the air", Christine Lagarde, managing director at IMF told reporters in Delhi. In an interview with NDTV’s Vikram Chandra, she said that the European crisis was less acute but not behind us.

Sony CEO Kazuo Hirai, left, listens to former-CEO Howard Stringer | Source: AP
Sony CEO Kazuo Hirai, left, listens to former-CEO Howard Stringer | Source: AP

Finance Minister Pranab Mukherjee imposed an import duty on gold and raised excise on unbranded jewellery in his budget. The Reserve Bank of India on Wednesday said that all non-banking finance companies (NBFCs), that lend against gold as collateral, should maintain a loan-to-value ratio not exceeding 60 per cent for loans granted against gold jewellery.

According to RBI, NBFCs should not grant any advance against bullion/ primary gold and gold coins. This means there would be no lending against pure gold and gold coins.

This announcement could hurt companies like Manappuram Finance and Muthoot Finance. The current loan-to-value for Mannapuram stands at 75 per cent and for Muthoot at 62 per cent. These companies would have to bring this down to the level.

The RBI move could discourage borrowing against gold. India is the biggest importer of the yellow metal. Mukherjee said last Friday that India imported $40 billion worth of gold in 2011-12 despite a sharp rise in gold prices. This further widened India's trade deficit.

The prudential norms have been imposed considering the rapid growth of such firms and nature of their business model which has increased dependence on public finance, the RBI said in a notification on its website.

The companies should also disclose in their balance sheet the percentage of such loans to their total assets.

All NBFCs with such loans comprising 50 per cent or more of their financial assets shall maintain a minimum tier-1 capital of 12 per cent by April 1, 2014, the RBI said.

RBI has not specified any time line for these companies to adhere to the new rule.

Manappuram Finance, Muthoot Finance and SKS Microfinance are some of the NBFCs that offer loans against gold in India.

On Wednesday, the most-active gold for April delivery on the Multi Commodity Exchange (MCX) was 0.20 per cent higher at Rs 27,859 per 10 grams following firm overseas markets and early weakness in the rupee.

(With inputs from Reuters)